When planning for retirement, most investors try to split their assets between stocks (higher risk, higher return) and federal U.S. government bonds (lower risk, and these days, much lower return). Problem is, stocks are enjoying an overextended winning streak. The S&P 500 is up over 7% year-to-date. That’s quite nice, especially after the 1.4% return that the same index had last year. But when we consider its performance in 2014 (13.5%), 2013 (32.2%), and 2012 (15.9%), investors are right to give pause. Has the market outperformed for too many years in a row? Perhaps. The S&P’s price-to-earnings ratio (P/E ratio) shows that the index is roughly twice as expensive now as it was 5 years ago.
This is the point where most new investors get terrified and simply run away. “The market’s too expensive,” they think, and instead put their money in bonds (low yields) or cash (no yields). Or they invest in real estate (which historically underperforms the stock market by a huge margin). Any of these options would be a big mistake. We can juice our income even more and diversify away from stocks by buying junk bonds. One way to do this is to get the iShares iBoxx High Yield Corporate Bond Fund (HYG). We can buy the iShares Barclays 20+ Year Treasury Bond ETF (TLT), which currently pays a 2.2% dividend. The Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV), which has recovered nicely after the big market turmoil earlier this year.